Regal (Hastings) Ltd. v. Gulliver (1942) and Industrial Development Consultants Ltd. v. Cooley (1972)

Regal states the rule at its strictest: a fiduciary who makes a profit by reason of and in the course of his office accounts for it, however honest he was, however much the company benefited, and even where the company could not have taken the opportunity itself. Cooley is the case that shows the rule has an outer edge and then pushes past it: there the profit was made after the director had left, on a contract the company would probably never have won, from information given to him in a private capacity — and he still had to account.

Take Regal for the principle and Cooley for its reach. Between them they answer nearly every corporate-opportunity problem.

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# Part I — Regal (Hastings) Ltd. v. Gulliver

In the summer of 1935 the directors of Regal (Hastings) Ltd., with a view to the future development or sale of their company, wanted to acquire other cinemas. In Hastings and St Leonards there were two small ones, the Elite and the De Luxe. Negotiations began both for acquiring or controlling them by lease and for the disposal of Regal itself.

Part of the machinery was a subsidiary, Hastings Amalgamated Cinemas Ltd., registered on 26 September 1935 with a capital of £5,000 in £1 shares. Its directors were the same as Regal's, with the addition of Garton, Regal's solicitor. The intention was that only £2,000 of the capital would be issued and would be subscribed by Regal, which would control it.

Difficulties arose over the lease of the two cinemas, including whether the directors of Amalgamated would guarantee the rent; they were not willing to do so. Everything was settled at a meeting on 2 October 1935 — described as a peculiar meeting, because the directors of both companies were summoned to the same place at the same time, and although separate minutes were afterwards attributed to each company, it is not easy to say for which company any director was appearing at any moment.

At that meeting:

• it was resolved that Regal apply for 2,000 shares in Amalgamated, £2,000 being the total Regal could find;
• the value of the leases of the two cinemas was taken at £15,000, and the draft lease was approved;
• each Regal director except Gulliver agreed to apply for 500 shares, Gulliver saying he would find people to take up 500;
• the Regal directors requested Garton to take up 500.

The capital was thus fully subscribed: Regal 2,000, the five directors 500 each, and Gulliver's nominees the remaining 500. Shortly afterwards the shares were sold at a substantial profit. Regal — by then under new control — sued to recover £7,018 8s. 4d. from the former directors and £1,402 1s. 8d. from Garton, together with £233 15s. paid to Garton on a bill of costs.

At trial the case was in substance run as one of fraud, and the trial judge, applying a criminal standard of proof to the allegation, gave judgment for the defendants. In the Court of Appeal, Du Parcq LJ pointed out that "it is common ground that there is no allegation of fraud in the pleadings whatever", and concluded that "It must be taken, therefore, that the respondents acted bonafide and without fraud."

Lord Greene MR dismissed the appeal on that footing: had the decision to limit Regal's investment to £2,000 been made in bad faith, the directors could not have kept the profit; but once the decision was admittedly bona fide, "their obligation to refrain from acquiring these shares came to an end", because "the only way in which these directors could secure that benefit for the company was by putting up the money themselves."

As Viscount Sankey observed, "It seems therefore that the absence of fraud was the reason of the decision." In the House of Lords, counsel for Regal abandoned fraud altogether and argued the case purely as one of fiduciary accountability.

Appeal allowed against the four directors other than Gulliver: they were liable to account for the profits on their shares. The appeals against Gulliver and Garton were dismissed.

Where a person in a fiduciary position makes a profit by reason of, and in the course of the execution of, that office, he is liable to account for it to the person he serves, whether or not he acted in good faith, whether or not the company could itself have obtained the profit, and whether or not the company suffered any loss. The liability is escaped only by the informed consent of the company in general meeting.

Viscount Sankey — the general rule, and why breach of trust was no answer

The rule is stated in classical form: "no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect." It comes from the trust cases — Keech v. Sandford — and "applies to agents, as, for example, solicitors and directors, when acting in a fiduciary capacity."

The respondents' best point was that it would have been a breach of trust to invest more than £2,000 of Regal's money, so the transaction could only have been financed by the directors putting up the balance. Viscount Sankey accepted the premise and rejected the conclusion: it cannot be maintained that the necessity brought them outside the general rule. "At all material times they were directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit for themselves. They sought no authority from the company, to do so".

He also identified the two recognised exceptions: where the fiduciary divested himself of the trust sufficiently long before the purchase to exclude the use of special information, and where he purchases "with full knowledge and consent of his cestui que trust."

Lord Russell of Killowen — the passage to memorise

The rule of equity which insists on those who by use of a fiduciary position make a profit being liable to account for it

"in no way depends on fraud, or absence of bona fides"

nor upon "such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff", or whether "the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."

Keech v. Sandford is the illustration of that strictness: a lease of the profits of a market was devised to a trustee for an infant, renewal for the infant was refused and "It was absolutely unobtainable", and the trustee who took the renewal for himself was nonetheless accountable.

Lord Russell then made the two findings that decide the case. First, on the facts, "these shares, when acquired by the directors, were acquired by reason, and only by reason of the fact that they were directors of Regal, and in the course of their execution of that office." Second, that directors stand in a fiduciary relationship to the company in the exercise of their powers — approaching the office through Jessel MR's description of directors as "really commercial men managing a trading concern for the benefit of themselves and all other shareholders in it", who are trustees of assets in their hands but not of a debt due to the company.

He disposed of the impossibility argument by returning to Keech: "It was impossible for the cestui que trust" in Keech v. Sandford "to obtain the lease, nevertheless the trustee was accountable." The suggestion that the directors applied merely as members of the public he called "a travesty of the facts".

And he gave the escape route, which is the practical lesson of the case: "They could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting. In default of such approval, the liability to account must remain."

Why Gulliver and Garton escaped

The two acquittals are as important as the four convictions, because they show the rule's boundaries.

Gulliver did not take shares and made no profit. He found subscribers — £200 from South Down Land Company, £100 from a Miss Geering and £200 from Seguliva A.G., a Swiss company. They paid, the shares were allotted to them and held on their own account, and when the shares were sold "no part of the moneys went into Gulliver's pocket or into his account." No profit, no accountability.

Garton came within the consent exception. He took his 500 shares at the express invitation of Regal's chairman; Gulliver accepted in cross-examination that "I invited Mr. Garton to put the £500 and to make up the £3,000." He therefore took the shares "with the full knowledge and consent of Regal".

Notice the asymmetry that students find surprising and examiners like: the solicitor who was asked by the board escapes, while the directors who resolved among themselves do not. That is because the directors could not give themselves the company's consent — a point reinforced by Lord Russell's reading of the Amalgamated resolution inviting "the directors" to subscribe: the directors of Amalgamated were not conveying an invitation to themselves — "That would be ridiculous."

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# Part II — Industrial Development Consultants Ltd. v. Cooley

The defendant, Neville Cooley, had been chief architect of the West Midlands Gas Board. In 1967 he met Mr Howard Hicks, chairman and managing director of a group that included the plaintiff company, which offered large industrial enterprises comprehensive construction services — architects, engineers and project managers. Cooley was appointed managing director of the plaintiffs with effect from February 1968, at a salary of £6,000 with fringe benefits and a six-month probationary period; no written agreement was ever signed. The point of the appointment was that his experience in the gas industry would help the plaintiffs win public-sector work, particularly from the gas boards.

In February 1968 Cooley corresponded with the chairman and surveyor of the Eastern Gas Board about the plaintiffs designing and constructing new depots. The proposition was rejected.

In May 1969 Mr Smettom, the new deputy chairman of the Eastern Gas Board, approached Cooley in a private capacity about the proposed depots. They met on 13 June 1969. No definite commitment was made, but a depot at Letchworth was mentioned, and Cooley realised that if he could get a quick release from the plaintiffs he stood a good chance of getting a very valuable contract for himself.

On 16 June 1969 he told Mr Hicks that his health was such that he could not carry on. Believing him seriously ill, Hicks released him from 1 August 1969. The representation of ill health was found to be untrue to Cooley's knowledge, dishonest, and a pretext to secure a quick release. He registered a business name, "Design Group for Industry", from his private address, stating the start of business as 8 June 1969, and on 17 June told Smettom that he had discussed the matter with Hicks, who appreciated his intentions.

On 6 August the gas board offered him employment on a scheme found to be substantially the same business the plaintiffs had tried to get in 1968: four depots at an estimated capital cost of £1,700,000, likely to be considerably higher in fact.

On 2 December 1969 the plaintiffs issued a writ claiming a declaration that he was a trustee of the contracts, an account of all fees and remuneration, and alternatively damages.

The argument was carefully built, and it is worth learning because it is the strongest case that can be made against liability. Smettom approached Cooley in a private capacity; therefore what he did on and after 13 June was not done qua managing director, the information was not received qua managing director, and there was no duty — not even the barest contractual duty — to pass it on. Therefore he did not get the work by virtue of his position; on the contrary "the defendant could never have got that work so long as he was their managing director", so the Regal requirements were not satisfied. And the plaintiffs would never have got the work anyway, because the gas board's officers objected in principle to that type of organisation. Contracts, it was said, fall into two classes: contracts with the company in which the director is interested, where conflict is inherent and disclosure is required; and contracts with a third party, where there is no inherent conflict unless the contract was equally available to the employer.

An order for an account was made. Cooley was liable to account for the profit, "because the defendant has made and will make his profit as a result of having allowed his interests and his duty to conflict."

A director who, while in office, learns of an opportunity in circumstances where his personal interest and his duty to the company conflict, must pass the information to the company and not keep it for his own profit. He is accountable for a profit made from that opportunity even though the contract was concluded after he left, even though the information came to him in a private capacity, and even though the company would probably never have obtained the contract itself; whether the benefit would have been obtained but for the breach is irrelevant.

The moment of conflict

Roskill J located the breach precisely in time: when the defendant embarked on "this course of conduct of getting information on June 13, using that information and preparing those documents over the weekend of June 14/15 and sending them off on June 17", he put himself in a position where "his duty to his employers, the plaintiffs, and his own private interests conflicted and conflicted grievously." Having the fiduciary relationship, "it was his duty once he got this information to pass it to his employers and not to guard it for his own personal purposes and profit."

The strictness of the principle

The judgment traces the rule through the same authorities as Regal. Keech v. Sandford shows "how rigidly this rule has always been applied." Malins V.C. in the Imperial Mercantile Credit case stated that directors "are bound to disregard their own private interests whenever, a regard to them conflicts with the proper discharge of such duty." James LJ in Parker v. MacKenna laid down "that in this court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal; that that rule is an inflexible rule", and that the court is not entitled to receive evidence or argument as to whether the principal in fact suffered injury, "for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that."

The uncomfortable arithmetic, faced squarely

Roskill J did not pretend the result was tidy. If the doctrine is applied, the plaintiffs "will receive a benefit which, on Mr. Smettom's evidence at least, it is unlikely they would have got for themselves had the defendant complied with his duty to them." If it is not, the defendant keeps a large profit made from deliberately placing himself in a position of conflict — "something which he was able to get solely by reason of his breach of fiduciary duty to the plaintiffs."

He resolved it by the settled rule: "the question whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant."

Reading Regal correctly

Counsel had made much of phrases in Regal such as accounting for a benefit obtained "in the course of and owing to his directorship", pointing out that in one sense the benefit here did not arise because of the directorship, since Cooley could not have had the work while he remained a director. Roskill J's answer is the methodological point of the case: such passages must be read "having regard to the facts of that case to which those passages and those statements were directed", and what governs is the basic principle — "It is an over-riding principle of equity that a man must not be allowed to put himself in a position in which his fiduciary duty and his interests conflict. The variety of cases where that can happen is infinite." That there had never been a case on precisely these facts "is of no import."

The characterisation he adopted is the best short description of a corporate-opportunity breach: what the defendant did in May, June and July "was to substitute himself as an individual for the company of which he was managing director and to which he owed a fiduciary duty."

The alternative measure of damages

Because the account was ordered, this is obiter, but it is a valuable illustration of loss-of-a-chance reasoning. Had he been wrong on the main point, Roskill J would have assessed the plaintiffs' lost opportunity. He accepted the gas board witnesses as truthful, so it was far from certain the plaintiffs would ever have won the contract; but there was always a possibility of persuading the board to change its mind — and, ironically, "it would have been the defendant's duty to try to persuade them to change their mind." He rated the chance at not greater than 10 per cent, and would have awarded damages representing a 10 per cent chance.

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| Question | Regal (Hastings) | Cooley | |---|---|---| | Was there fraud? | Expressly negatived; the case was argued without it | Yes — a dishonest misrepresentation of ill health — but the judge rested his decision on the conflict principle, not on it | | Could the company have taken the opportunity? | No — it could not find more than £2,000 | Probably not — the customer objected to the plaintiffs in principle | | Did the profit arise in the office? | Yes, "by reason, and only by reason" of it | The contract came after he left, and the information came privately | | Was the company consented? | No, except in Garton's case | No | | Result | Four directors account; Gulliver and Garton do not | Account ordered |

Section 166 codifies the position. A director "shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company" (s. 166(4)), and "shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates" (s. 166(7)). Section 166(5) adds the remedy in terms that match the equitable account: if a director is found guilty of making any undue gain, "he shall be liable to pay an amount equal to that gain to the company." Section 184 requires disclosure of interest in contracts, and s. 188 governs related party transactions.

The general-meeting escape route in Regal also survives in shape: the statutory scheme repeatedly makes an interested transaction lawful only with the informed approval of the company through its members or an unconflicted board.

1. Open with the no-profit and no-conflict rules and quote Lord Russell's sentence — liability "in no way depends on fraud, or absence of bona fides".
2. Use Regal for the four irrelevancies: no fraud needed, no loss to the company needed, no ability of the company to take the opportunity needed, and good intentions no defence.
3. Use Gulliver and Garton for the two defences: no profit at all, and full knowledge and consent of the company.
4. Use Cooley to defeat the three clever arguments: that the profit came after office, that the information came privately, and that the company would never have got the contract.
5. Say what the company must do to make it lawful — a resolution of the members in general meeting, antecedent or subsequent — and then map that onto ss. 166, 184 and 188.

In a problem question, fix the date on which the conflict arose, not the date on which the money was made. That single move decides Cooley, and it decides almost every corporate-opportunity problem built on it.